ThinkAdvisor: IRS Ruling Could Help Fee-Only Advisors Use Life Insurance

[DHK]

This... is just plain stupid. This ruling has one purpose and one purpose only: to let fee-only advisors continue to call themselves 'fee only' and (quite frankly) charge an administrative fee on assets they normally couldn't charge a fee on (at least not directly).

This is NOT a win for the consumer! This is a 'win' for the advisor who doesn't want to "stoop themselves" to calling themselves "fee-based" or have to disclose that they'd earn an "evil commission" for selling a product that is (should be) in the client's best interest for their planning.

EDIT: I am all for different commission structures, but it needs to be on the part of the insurance company... not the client's policy values.

/end rant

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[fred thompson]

Chill Bro! Chill !
You are way off.

This private letter ruling is a great thing!
First it only applies to a NO LOAD, NO COMMISSION, NO SURRENDER CHARGE, VARIABLE LIFE POLICY!. Nothing else!. No one is getting a commission and getting a fee !
Since it is a Variable Policy the advisor is managing the assets inside the policy and getting paid as he would for managing any other investment assets. Up to now to get paid advisors are either billing other accounts they manage the fee, billing the client directly the fee or in the Case of Ameritas and Nationwide getting the fee as a no cost policy loan from the policy cash values. Being able to have the fee paid without having a policy loan is a better option, It is also better than billing other accounts or billing directly.

Variable policies are not for everyone. In Nationwide's case their goal is to offer the advantages of private placement insurance to the mass affluent.

As an example. A client had their one year anniversary 10/29. Their walk away cash in pocket value after all costs and fee's after 1year is premium paid $100,000 surrender cash value $109,252. The product is for people with substantial non qualified assets, want professional management and want the quadruple tax advantage of tax free to heirs, tax free growth ,tax free income and getting rid of the end of year 1099's from their mutual fund investments.

A fee is far superior to a commission on a variable policy for people that want the walk away at anytime option. Commission = higher premium loads and surrender charges. Higher loads = less cash in the early years for growth and compounding= the opposite of what the buyers of these policies are looking for.

Far different product and risk profile than someone buying a whole life or IUL policy.

 

[DHK]

First it only applies to a NO LOAD, NO COMMISSION, NO SURRENDER CHARGE, VARIABLE LIFE POLICY!. Nothing else!

First, I will admit that I did not read the PLR. I'm only referencing the article.

Second, the article did not specificy any particular policy. If it has specified PPLI, that would've changed everything on how I would interpet it.

In Nationwide's case their goal is to offer the advantages of private placement insurance to the mass affluent.

That would certainly be an interesting development, but that would require securities registration to represent a domestic insurer. I think I'd rather work with offshore insurers (no securities registration requirements), but they may not be driven to develop such programs for the mass affluent.

 

[walthamny]

Just to clarify here you can become a RIA with just a series 65 in most states. You dont need to register with a broker dealer to be able to sell no load Variable Life with Nationwide. Agent is still someone at Nationwide, they have to sign of on the suitability. RIA only does the fund allocation and collect the fees on AUM. In the old world, in order to get compensation, RIA had to be registered with a Broker dealer which meant giving independence on compliance side. Nationwide wants to market this to expand relationship with RIA's. Its a big deal for Nationwide because now RIA's can get paid the same way whether funds are in a VUL or at a custodian.

 

[Tahoe Ray]

Second, the article did not specificy any particular policy. If it has specified PPLI, that would've changed everything on how I would interpet it.

3rd paragraph:

The letters would affect a variable universal life insurance policy that’s registered with the Securities and Exchange Commission as a security, as well as being registered with state insurance regulators as a life insurance policy.

 

[DHK]

All VUL is registered as a security.

 

[DHK]

Just to clarify here you can become a RIA with just a series 65 in most states. You dont need to register with a broker dealer to be able to sell no load Variable Life with Nationwide. Agent is still someone at Nationwide, they have to sign of on the suitability. RIA only does the fund allocation and collect the fees on AUM. In the old world, in order to get compensation, RIA had to be registered with a Broker dealer which meant giving independence on compliance side. Nationwide wants to market this to expand relationship with RIA's. Its a big deal for Nationwide because now RIA's can get paid the same way whether funds are in a VUL or at a custodian.

That's not PPLI though. PPLI is not allocated with funds, at least not as its primary assets or purpose. Think of PPLI as a trust that happens to be an insurance wrapper. You can put various assets in them - real estate, business owership interests, and more.

The problem with most PPLI is that you cannot have incidents of ownership in the assets in that policy. Also, there are certain ratios that have to be met, so you can't just put your business in a life insurance policy as the only asset.

If the policy is a domestic policy, you must be securities licensed (since it is funded with securities such as business interests; a business is a security). If the policy is with an offshore carrier, no securities license is required.

PPLI is still life insurance and there is some levelized compensation.

I wish the article was more specific.

 

[Tahoe Ray]

All VUL is registered as a security.

Correct.

Maybe I'm misunderstanding the article.

The carrier just wants RIAs to be able to pull fees from the cash values of the client's policies without tax ramifications (similar to pulling fees from qualified accounts) and to be considered a policy expense (not a w/d or loan).

What am I missing?

 

[DHK]

Correct.

Maybe I'm misunderstanding the article.

The carrier just wants RIAs to be able to pull fees from the cash values of the client's policies without tax ramifications (similar to pulling fees from qualified accounts) and to be considered a policy expense (not a w/d or loan).

What am I missing?

Unless it's a policy designed from the beginning to charge that fee (and disclose it as an advisory fee as opposed to renewal compensation), it's just another layer of a fee on top of existing charges. More fees on top of existing fees that already exist?

More fees on a product with securities market risk will surely lead to a higher lapse ratio of those policies.

I bet there are already fee-based VUL policies out there. Jackson National would probably have at least one.

I'd be far more in favor of a separate billing for "assets under administration" or "assets under advisement" for assets held away from the RIA custodian and can be managed that way.

Other than PPLI (which is a very different animal), this is just a money grab and I suspect that the RIA and the "fiduciary" has no idea what they just asked to have happen. The cost will be the policy itself with increased fees (if not designed from the ground up to be a fee-based product).

 

[Tahoe Ray]

Unless it's a policy designed from the beginning to charge that fee (and disclose it as an advisory fee as opposed to renewal compensation), it's just another layer of a fee on top of existing charges. More fees on top of existing fees that already exist?

More fees on a product with securities market risk will surely lead to a higher lapse ratio of those policies.

I bet there are already fee-based VUL policies out there. Jackson National would probably have at least one.

I'd be far more in favor of a separate billing for "assets under administration" or "assets under advisement" for assets held away from the RIA custodian and can be managed that way.

Other than PPLI (which is a very different animal), this is just a money grab and I suspect that the RIA and the "fiduciary" has no idea what they just asked to have happen. The cost will be the policy itself with increased fees (if not designed from the ground up to be a fee-based product).

Assets under administration is confusing for the consumer when you're making up for the fees that you can't pull from one bucket (the VUL) by pulling more from another.

IRS has already stipulated in PLRs that you can't pull fees from commission-based NQ annuities. You have to pick one or the other.

This is definitely geared towards the no-load VUL market, products designed to be less costly from the start.